Revisiting Depreciation Recapture Issues When Cashing Out (Not 1031 Exchanging)

It is that time of year again when we field many questions regarding the reporting and tax treatment of 1031 Exchanges, or lack of 1031 Exchanges, on taxpayers income tax returns. 

There seems to be many more questions this year because many taxpayers just sold and cashed out rather than 1031 Exchanging again, and now have significant income tax liabilities. 

The one income tax issue involved with rental property that is often misunderstood is depreciation recapture.  Depreciation is mandatory if you buy and hold rental property or investment property, and the depreciation is deferred into the future upon sale of the rental property as long as you are structuring a 1031 Exchange transaction.  However, the depreciation will be recaptured upon sale if you are not 1031 Exchanging.

This is the reason that we have noticed an increase in depreciation recapture questions.  So, I thought that I would link to an discussion board post on depreciation recapture that will help explain the issue in greater detail.

Strategic Capital Gain Tax Liability Management: A New Way Out

1031 Tax Deferred Exchange Not Always Best Option
Investors often flock to the 1031 tax deferred exchange strategy each time they are contemplating selling real estate or personal property without considering all of the available options.

And, while I am certainly biased toward the 1031 tax deferred exchange with my 24 years in the 1031 exchange industry, and the 1031 exchange is generally the best tax deferred solution available, I am also the first to admit that the 1031 tax deferred exchange strategy may not always be the best option for certain investors under certain circumstances.

The New Way Out
There may be a New Way Out; an innovative tax deferred strategy available to investors that are selling real estate, businesses or other assets that do not wish to acquire like-kind replacement property as required under the 1031 tax deferred exchange or may not be able to do so because of real estate, lending, or credit market conditions.

It can be exceptionally challenging to structure 1031 tax deferred exchange for the sale of a business or assets used in a business. Identifying suitable like-kind replacement property can be most challenging, if not down right impossible in cases like this.

Deferred Sales Trust
This new and innovative capital gain tax deferral strategy is called the Deferred Sales Trust™ and operates very similar to an installment sales contract under Section 453 of the Internal Revenue Code.

The Deferred Sales Trust permits the investor to sell real or personal property, especially a business, and defer the payment over the term of the installment sale contact or seller carry back note. The Deferred Sales Trust can be an exceptional estate planning tool and even a rescue vehicle for a failed 1031 tax deferred exchange.